Q&A Hero

Q: Deferral of capital gains tax does not I) mean that the investor doesn't need to pay taxes until the investment is sold. II) allow the investment to grow at a faster rate. III) mean that you might escape the capital gains tax if you live long enough. IV) provide a tax shelter for investors. A. III B. II C. I, II, and V D. II, III, and IV

Q: Deferral of capital gains tax I) means that the investor doesn't need to pay taxes until the investment is sold. II) allows the investment to grow at a faster rate. III) means that you might escape the capital gains tax if you live long enough. IV) provides a tax shelter for investors. A. II and III B. I, II, IV C. I, III, and V D. II, III, and IV

Q: Professional financial planners should A. assess their client's risk and return requirements on a one time basis. B. explain the investment plan to the client. C. inform the client about the outcome of the plan. D. assess their client's risk and return requirements on a one time basis, explain the investment plan to the client, and inform the client about the outcome of the plan. E. explain the investment plan to the client and inform the client about the outcome of the plan.

Q: A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries. A. tax shelter B. defined contribution plan C. personal trust D. fixed annuity E. Keogh plan

Q: Target date retirement funds are not A. funds of funds diversified across stocks and bonds. B. designed to change their asset allocation as time passes. C. a simple, but useful, strategy. D. designed to function much like hedge funds.

Q: The optimal portfolio on the efficient frontier for a given investor does not depend on A. the investor's degree of risk tolerance. B. the coefficient, A, which is a measure of risk aversion. C. the investor's required rate of return. D. the investor's degree of risk tolerance and the investor's required rate of return. E. the investor's degree of risk tolerance and the coefficient, A, which is a measure of risk aversion.

Q: The optimal portfolio on the efficient frontier for a given investor depends on A. the investor's degree of risk tolerance. B. the coefficient, A, which is a measure of risk aversion. C. the investor's required rate of return. D. the investor's degree of risk tolerance and the investor's required rate of return. E. the investor's degree of risk tolerance and the coefficient, A, which is a measure of risk aversion.

Q: General pension funds typically invest __________ of their funds in equity securities. A. none B. 5-10% C. 15-35% D. 40-60% E. more than 60%

Q: The first step a pension fund should take before beginning to invest is to A. establish investment objectives. B. develop a list of investment managers with superior records to interview. C. establish asset allocation guidelines. D. decide between active and passive management.

Q: Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. If the first year's actual investment return is 8%, what is the starting benefit payment? A. $30,000.00 B. $33,333.33 C. $51,481.38 D. $52,452.73 E. The answer cannot be determined from the information provided.

Q: Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. What is the hypothetical constant benefit payment? A. $30,000.00 B. $33,333.33 C. $51,481.38 D. $52,452.73 E. The answer cannot be determined from the information provided.

Q: For an individual investor, the value of home ownership is likely to be viewed A. as a hedge against increases in rental rates. B. as a guarantee of availability of a particular residence. C. as a hedge against inflation. D. as a hedge against increases in rental rates and as a guarantee of availability of a particular residence. E. All of the options are correct.

Q: Institutional investors will rarely invest in which of these asset classes? A. Bonds B. Stocks C. Cash D. Real estate E. Precious metals

Q: The shortest time horizons are likely to be set by A. banks. B. property and casualty insurance companies. C. pension funds. D. banks and property and casualty insurance companies. E. property and casualty insurance companies and pension funds.

Q: The longest time horizons are likely to be set by A. banks. B. property and casualty insurance companies. C. endowment funds. D. banks and endowment funds. E. property and casualty insurance companies and endowment funds.

Q: The longest time horizons are likely to be set by A. banks. B. property and casualty insurance companies. C. pension funds. D. banks and pension funds. E. property and casualty insurance companies and pension funds.

Q: The prudent investor rule requires A. executives of companies to avoid investing in options of companies by which they are employed. B. executives of companies to disclose their transactions in stocks of companies by which they are employed. C. professional investors who manage money for others to avoid all risky investments. D. professional investors who manage money for others to constrain their investments to those that would have been approved by the prudent investor.

Q: Suppose that the pre tax holding period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are an individual in a high marginal tax bracket and do not intend to sell the stocks during the holding period, A. stock A will have a higher after tax holding period return than stock B. B. the after tax holding period returns on stocks A and B will be the same. C. stock B will have a higher after tax holding period return than stock A. D. it is impossible to determine which stock will have a higher after tax holding period return given the information available.

Q: When a company sets up a defined contribution pension plan, the __________ bears all the risk, and the __________ receives all the return from the plan's assets. A. employee; employee B. employee; employer C. employer; employee D. employer; employer E. Cannot determine; depends on the economic environment.

Q: The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors. A. broader; more risk averse B. broader; less risk averse C. more limited; more risk averse D. more limited; less risk averse

Q: Liquidity is A. the ease with which an asset can be sold. B. the ability to sell an asset for a fair price. C. the degree of inflation protection an asset provides. D. the ease with which an asset can be sold and the ability to sell an asset for a fair price. E. All of the options are correct.

Q: The investment horizon is A. the investor's expected age at death. B. the starting date for establishing investment constraints. C. based on the investor's risk tolerance. D. the date at which the portfolio is expected to be fully or partially liquidated.

Q: __________ are boundaries that investors place on their choice of investment assets. A. Investment constraints B. Investment objectives C. Investment policies D. All of the options are correct E. None of the options are correct.

Q: A remainderman is A. a stockbroker who remained working on Wall Street after the 1987 crash. B. an employee of a trustee. C. one who receives interest and dividend income from a trust during their lifetime. D. one who receives the principal of a trust when it is dissolved.

Q: The stage an individual is in his/her life cycle will affect his/her A. return requirements. B. risk tolerance. C. asset allocation. D. return requirements and risk tolerance. E. All of the options are correct.

Q: __________ center on the trade off between the return the investor wants and how much risk the investor is willing to assume. A. Investment constraints B. Investment objectives C. Investment policies D. All of the options are correct. E. None of the options are correct.

Q: Endowment funds are held by A. charitable organizations. B. educational institutions. C. for profit firms. D. charitable organizations and educational institutions. E. educational institutions and for profit firms.

Q: Variable life insurance A. combines life insurance with a tax deferred annuity. B. provides a minimum death benefit that increases subject to investment performance. C. can be converted to a stream of income. D. All of the options are correct. E. None of the options are correct.

Q: An important benefit of Keogh plans is that A. they are not taxable until funds are withdrawn as benefits. B. they are protected against inflation. C. they are automatically insured by the Federal government. D. they are not taxable until funds are withdrawn as benefits, and they are protected against inflation. E. they are not taxable until funds are withdrawn as benefits, and they are automatically insured by the Federal government.

Q: The __________ the proportion of total return that is in the form of price appreciation, the __________ will be the value of the tax deferral option for taxable investors. A. greater; greater B. greater; lower C. lower; greater D. The answer cannot be determined from the information provided. E. None of the options are correct.

Q: Workers who change jobs may wind up with lower pension benefits at retirement than otherwise identical workers who stay with the same employer, even if the employers have defined benefit plans with the same final pay benefit formula. This is referred to as A. an accumulated benefit obligation. B. an unfunded liability. C. immunization. D. indexation. E. the portability problem.

Q: A fully funded pension plan can invest surplus assets in equities provided it reduces the proportion in equities when the value of the fund drops near the accumulated benefit obligation. This strategy is referred to as A. immunization. B. hedging. C. diversification. D. contingent immunization. E. overfunding.

Q: __________ can be used to create a perfect inflation hedge. A. Gold B. Real estate C. TIPS D. The S&P 500 Index E. None of the options are correct.

Q: Questionnaires and attitude surveys suggest that risk tolerance A. increases with age. B. decreases with age. C. stays constant over the life cycle for most investors. D. cannot be assessed. E. None of the options are correct.

Q: __________ in the process of asset allocation. A. Deriving the efficient portfolio frontier is a step B. Specifying asset classes to be included in the portfolio is a step C. Specifying the capital market expectations is a step D. All of the options are steps. E. None of the options are steps.

Q: One incorrect belief that is often cited as a reason for fully funded pension funds to invest in equities is A. stocks have higher risk. B. bonds have lower returns. C. stocks provide a hedge against inflation. D. stocks have higher returns. E. All of the options are incorrect beliefs that are often cited.

Q: __________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints. A. Investment constraints B. Investment objectives C. Investment policies D. All of the options are correct. E. None of the options are correct.

Q: The feedback phase of the CFA Institute's investment management process A. uses data about the client and capital market. B. uses details of optimal asset allocation and security selection. C. uses changes in expectations and objectives. D. All of the options are correct. E. None of the options are correct.

Q: The execution phase of the CFA Institute's investment management process A. uses data about the client and capital market. B. uses details of optimal asset allocation and security selection. C. uses changes in expectations and objectives. D. All of the options are correct. E. None of the options are correct.

Q: The planning phase of the CFA Institute's investment management process A. uses data about the client and capital market. B. uses details of optimal asset allocation and security selection. C. uses changes in expectations and objectives. D. All of the options are correct. E. None of the options are correct.

Q: The CFA Institute divides the process of portfolio management into three main elements, which are ______, ______, and ______. A. planning; execution; results B. security selection; asset allocation; action C. planning; asset allocation; feedback D. planning; execution; feedback E. risk tolerance; feedback; action

Q: The risk management section of an Investment Policy Statement for individual investors typically contains A. relevant constraints. B. other relevant considerations. C. performance measurement accountabilities, metrics for risk measurement, and the rebalancing process. D. relevant constraints and other relevant considerations. E. All of the options are correct.

Q: The governance section of an Investment Policy Statement for individual investors typically contains A. assigning the responsibility for determining investment policy. B. the review process for the IPS. C. assigning the responsibility for risk management. D. the review process for the IPS and assigning the responsibility for risk management. E. All of the options are correct.

Q: The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the A. return, distribution, and risk requirements. B. process for review of the IPS. C. appropriate metrics for risk measurement. D. relevant constraints. E. context, investor, and structure.

Q: The desirable components of an Investment Policy Statement for individual investors can be divided into A. three main elements consisting of scope and purpose, governance, and risk management. B. three main elements consisting of scope and purpose, governance, and investment, return and risk objectives. C. four main elements consisting of scope and purpose, governance, risk management, and feedback. D. four main elements consisting of scope and purpose, governance, risk management, and investment, return and risk objectives. E. five main elements consisting of scope and purpose, governance, risk management, investment, return and risk objectives, and evaluation.

Q: Target date retirement funds A. change their asset allocation as time passes. B. are a simple, but useful, strategy. C. function much like hedge funds. D. change their asset allocation as time passes and are a simple, but useful, strategy. E. All of the options are correct.

Q: Target date retirement funds are not A. inappropriate for most investors. B. very high in fees. C. designed to function much like hedge funds. D. inappropriate for most investors or very high in fees. E. All of the options are correct.

Q: Target date retirement funds A. are funds of funds diversified across stocks and bonds. B. are inappropriate for most investors. C. have very high fees. D. function much like hedge funds.

Q: The principle of duration matching is not A. used only in bond portfolio management. B. a useful concept for investments with target dates. C. matching one's assets to one's objectives. D. a useful concept for investments with target dates or matching one's assets to one's objectives. E. None of the options are correct.

Q: The principle of duration matching is A. used only in bond portfolio management. B. a useful concept for investments with target dates. C. matching one's assets to one's objectives. D. a useful concept for investments with target dates and means matching one's assets to one's objectives. E. None of the options are correct.

Q: Which of the following are commonly thought to be bad general investment guidelines? I) Don't try to outguess the market, buying and holding generally pays off. II) Diversify investments to spread risk. III) Investments should be highly concentrated in your company's stock. IV) 401K money is best placed in money market accounts because risk is very low. V) Investments should be allocated to stocks, bonds, and money market funds. A. I, III, and IV B. I, II, and IV C. II, IV, and V D. III and IV E. I, II, IV, and V

Q: Which of the following are commonly thought to be good general investment guidelines? I) Don't try to outguess the market, buying and holding generally pays off. II) Diversify investments to spread risk. III) Investments should be highly concentrated in your company's stock. IV) 401K money is best placed in money market accounts because risk is very low. V) Investments should be allocated to stocks, bonds, and money market funds. A. I, III, and IV B. I, II, and V C. II, IV, and V D. III, IV, and V E. I, II, IV, and V

Q: Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. If the first year's actual investment return is 7%, what is the starting benefit payment? A. $30,000.00 B. $74,401.95 C. $51,481.38 D. $52,452.73 E. The answer cannot be determined from the information provided.

Q: Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. What is the hypothetical constant benefit payment? A. $73,358.93 B. $33,333.33 C. $51,481.38 D. $52,452.73 E. The answer cannot be determined from the information provided.

Q: Assume that at retirement you have accumulated $750,000 in a variable annuity contract. The assumed investment return is 9%, and your life expectancy is 25 years. If the first year's actual investment return is 9%, what is the starting benefit payment? A. $30,000.00 B. $33,333.33 C. $76,354.69 D. $52,452.73 E. The answer cannot be determined from the information provided.

Q: Assume that at retirement you have accumulated $750,000 in a variable annuity contract. The assumed investment return is 9%, and your life expectancy is 25 years. What is the hypothetical constant benefit payment? A. $30,000.00 B. $33,333.33 C. $51,481.38 D. $76,354.69 E. The answer cannot be determined from the information provided.

Q: An income beneficiary is A. a stockbroker who remained working on Wall Street after the 1987 crash. B. an employee of a trustee. C. one who receives interest and dividend income from a trust during their lifetime. D. one who receives the principal of a trust when it is dissolved. E. None of the options are correct.

Q: Alan Barnett is 43 years old and has accumulated $78,000 in his self directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alan thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alan now has 40% of his money in the risk free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Alan expect to have in his risky account at retirement? A. $158,982 B. $309,529 C. $543,781 D. $224,651 E. $345,886

Q: Alan Barnett is 43 years old and has accumulated $78,000 in his self directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alan thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alan now has 40% of his money in the risk free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Alan be sure of having in the safe account at retirement? A. $59,473 B. $62,557 C. $78,943 D. $89,211 E. $104,632

Q: Alan Barnett is 43 years old and has accumulated $78,000 in his self directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alan thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alan now has 40% of his money in the risk free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Alan and by his employer on his behalf, how much will he put into the safe account each year; how much into the risky account? A. $1,500; $1,500 B. $1,200; $1,800 C. $2,000; $1,000 D. $2,500; $500 E. $1,400; $1,600

Q: Alan Barnett is 43 years old and has accumulated $78,000 in his self directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alan thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alan now has 40% of his money in the risk free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much does Alan currently have in the safe account; how much in the risky account? A. $31,200; $46,800 B. $39,000; $39,000 C. $15,900; $62,100 D. $45,300; $32,700 E. $64,000; $14,000

Q: Alex Goh is 39 years old and has accumulated $128,000 in his self directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 62 and figures he will live to age 86. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 11% and has a standard deviation of 37%. Alex now has 25% of his money in the risk free investment and 75% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Alex expect to have in his risky account at retirement? A. $1,400,326 B. $1,309,529 C. $1,543,781 D. $1,224,651 E. $1,345,886

Q: Alex Goh is 39 years old and has accumulated $128,000 in his self directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 62 and figures he will live to age 86. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 11% and has a standard deviation of 37%. Alex now has 25% of his money in the risk free investment and 75% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Alex be sure of having in the safe account at retirement? A. $132,473 B. $162,557 C. $178,943 D. $189,211 E. $124,643

Q: Alex Goh is 39 years old and has accumulated $128,000 in his self directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 62 and figures he will live to age 86. The plan allows for two types of investments. One offers a 4% risk free real rate of return. The other offers an expected return of 11% and has a standard deviation of 37%. Alex now has 25% of his money in the risk free investment and 75% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. Of the total amount of new funds that will be invested by Alex and by his employer on his behalf, how much will Alex put into the safe account each year; how much into the risky account? A. $2,500; $2,500 B. $3,200; $1,800 C. $3,000; $2,000 D. $1,250; $3,750 E. $2,400; $2,600

Q: Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, does not depend on I) the investor's coefficient of risk aversion. II) the value of the at-the-money call option on the market portfolio. III) the value of the out-of-the-money call option on the market portfolio. IV) the precision of the security analyst. V) the distribution of the squared information ratio in the universe of securities. A. I, II, and IV B. II, III, and V C. II and III D. I, IV, and V E. II, IV, and V

Q: Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, depends on I) the investor's coefficient of risk aversion. II) the value of the at-the-money call option on the market portfolio. III) the value of the out-of-the-money call option on the market portfolio. IV) the precision of the security analyst. V) the distribution of the squared information ratio in the universe of securities. A. I, II, and IV B. I, III, and V C. II, IV, and V D. I, IV, and V E. II, III, and V

Q: Perfect timing ability is equivalent to having __________ on the market portfolio. A. a call option B. a futures contract C. a put option D. a commodities contract

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 12%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio is A. 48.7%. B. 98.3%. C. 47.6%. D. 100.0%.

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 10%. The variance of the return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio is A. 48.7%. B. 98.4%. C. 51.3%. D. 100.0%.

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 11%. The variance of return on the market portfolio is 6%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 4%. The beta of the active portfolio is 1.1. The optimal proportion to invest in the active portfolio is A. 45%. B. 25%. C. 50%. D. 100%.

Q: The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is A. 36.30%. B. 5.84%. C. 19.60%. D. 24.17%. E. 26.0%.

Q: To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _________, and composite forecasts are used for the __________. A. passive index portfolio; active portfolio B. active portfolio, passive index portfolio C. expected return; standard deviation D. expected return ; beta coefficient E. alpha coefficient; beta coefficient

Q: An active portfolio manager faces a trade-off between I) using the Sharpe measure. II) using mean-variance analysis. III) exploiting perceived security mispricings. IV) holding too much of the risk-free asset. V) letting a few stocks dominate the portfolio. A. I and II B. II and V C. III and V D. III and IV E. II and III

Q: Ideally, clients would like to invest with the portfolio manager who has A. a moderate personal risk-aversion coefficient. B. a low personal risk-aversion coefficient. C. the highest Sharpe measure. D. the highest record of realized returns. E. the lowest record of standard deviations.

Q: A manager who uses the mean-variance theory to construct an optimal portfolio will satisfy A. investors with low risk-aversion coefficients. B. investors with high risk-aversion coefficients. C. investors with moderate risk-aversion coefficients. D. all investors regardless of their level of risk aversion. E. only clients with whom she has established long-term relationships because she knows their personal

Q: A purely passive strategy A. uses only index funds. B. uses weights that change in response to market conditions. C. uses only risk-free assets. D. is best if there is "noise" in realized returns. E. is useless if abnormal returns are available.

Q: One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's A. Sharpe ratio. B. information ratio. C. alpha. D. Treynor measure. E. None of the options are correct.

Q: According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to __________. A. the degree of mispricing; the nonsystematic risk of the security B. the degree of mispricing; the systematic risk of the security C. the market sensitivity of the security; the nonsystematic risk of the security D. the nonsystematic risk of the security; the systematic risk of the security E. the total return on the security; the nonsystematic risk of the security

Q: Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 18%. The standard deviation of the return on the market portfolio is 25%. The nonsystematic standard deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to invest in the active portfolio is A. 50.0%. B. 69.4%. C. 72.3%. D. 80.6%. E. 100.0%.

Q: The Treynor-Black model does not assume that A. the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. B. the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. C. the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. D. indexing is always optimal.